The Next Crisis?

By John Buell

Even in the midst of an unusually tepid recovery, our capitalist elites are laying the framework for another economic crisis, perhaps more dire than the last.

The post 2008 economic meltdown, which has resulted in Great Depression conditions in Europes peripheral states and in the deepest recession of the post-World War II period in the US, has its origin in the bursting of a vast bubble centered around housing and commercial real estate.

No new bubble appears to be on the scene, yet the underlying factors that encourage bubble formation are still in place. Though it is hard to predict when any bubble will burst, many seem to have similar underlying causes or catalysts.

Why did housing prices start their meteoric rise? Borrowers had to be ready and willing to borrow even despite marginal assets. Lenders must be eager to lend. The desire to borrow was not primarily a consequence of greed or irresponsibility. It was part of a desperate urge to keep pace with economic growth, and the needs it created, even as worker wages stagnated.

Greek economist Yanis Varoufakis sums it up nicely: ... from 1973 on, something spectacular happened in the United States: in a country priding itself over the fact that at least since the 1850s, real wages were steadily rising, thus giving every generation of workers the hope that their children would be better off than they were, real wages stagnated. To this day, they have not even recovered their 1973 real purchasing power.

All the more remarkable is the fact that this wage stagnation occurred even as worker productivity continued its steady increase. Though stagnant wages along with improving worker productivity produced growing surpluses for wealthy corporate owners it also created a problem. Wealthy corporate owners had more cash and assets on hand than they were ever likely to spend.

In addition, in a context where wealth had grown so dramatically, wealthy citizens wanted safe and yet relatively remunerative places to invest. Modern finance came to the rescue. It took the profits earned by the wealthy and gave them one more productive asset, loans back to the very workers whom they had exploited in the first place. The domestic part of this story is pretty well known. Less discussed is the role of US capitalism on the international stage. Escalating US balance of trade problems occasioned by the Vietnam War and War on Poverty expenditures helped set off the stagflation that so damaged US workers.

It also created a new international economic order, which Varoufakis has labled the Global Minotaur. A US economy ever less competitive still survived by purchasing goods from abroad on funds borrowed from producers and governments abroad.

Foreign governments eagerly supported the system because the US financial markets were becoming ever more deregulated, innovative in the language of their defenders, and those markets remained the deepest in the world. The housing bubble both in the US and worldwide would not have become anywhere near as immense but for these vast international flow of funds seeking higher than average returns purportedly with low risk, complements of financiers who now purported to understand and fully master market equilibria via sophisticated models.

As one looks over this sorry tale, what is most discouraging is the the number of elements that are still in place. The large investment banks that served as agents and enablers of the crisis were bailed out by governments and taxpayers, who now see themselves faulted as the cause of the crisis. And far from having learned their lessons, these banks continue to engage in shadowy derivative trading made possible by the continuing quest to find premium returns to the surplus. Both the European- and the US-centric economies continue to suffer from major imbalances, each the mirror image of the other.

The latter suffers from German neo-mercantilism imposing a trade surplus on its lesser states and unwilling to spend more. The former continues to rely on capital recirculated from the rest of the world. And in both public austerity is celebrated as the cure to debts brought on by a faulty international economy and a profligate private sector. That austerity in turn keeps wages low, thereby continually straining a system that depends on shady deals and leveraged finance to survive.

One cannot assume crisis is inevitable. More discussion of these possibilities may elicit significant change and reform. But there is ample cause for concern in the continuation of shadowy derivatives, massive inequality, the celebration of austerity, and a public sector already heavily burdened by the costs it has incurred to bail the banks.